If you've noticed a lot of “daily deal” sites on the Web lately, it's not your imagination. A year and a half ago, Groupon, the company that introduced the innovative concept of coupons for groups, made headlines with a staggering initial public offering, selling 35 million shares at $20 a share. The company's $700 million windfall created a small gold rush as sites offering special deals popped up all over the Web like dandelions. Deal sites can be a veritable boon for certain types of small businesses, but before you leap, you need to be aware of the pitfalls.
You've probably heard of Groupon and Living Social. You may be familiar with Fab.com, Bloomspot, Amazon Local, Google Offers, Groupalicious, BuyWithMe, DealPulp and Woot. And you may some day come across Mamapedia (“mom-approved deals”), AppSumo (“The Store for Entrepreneurs”) or TroopSwap (deals for military personnel and veterans).
Clearly there's a long list of daily sites to connect consumers with heavily discounted goods, services and experiences. Perhaps you've even thought about running a deal to move excess product or break out of a slump. The idea is tempting, but are these daily deal sites worth it?
Understanding How Deal Sites Work
To understand how the deal sites work, consider these facts:
- The deal site generally takes around 50% of the voucher value, sometimes even more
- 10–15% of purchased vouchers will probably go unused
- Not all customers spend more than the voucher value, and fewer still become repeat customers
- On the upside, a few deal-savvy customers could become evangelists for your brand
For customers, getting a great deal seems like a no-brainer. For business owners, however, a great deal could become their worst nightmare.
Daily Deal Returns Year's Worth of Disaster
One such case was the Need a Cake Bakery near London. The bakery, which normally employs 8 workers, offered a 75% discount on a dozen cupcakes through Groupon. Approximately 8,500 customers purchased the offer, and the small bakery was overwhelmed. It had to hire 25 extra helpers to meet the demand, and the increased payroll resulted in a loss on every order. The bakery lost approximately $20,000 on the campaign, wiping out its profits for the entire year. “Without doubt, it's the worst ever business decision I have made,” owner Rachel Brown said. “It's been an absolute nightmare.”
However, if your campaign is properly managed with carefully set limits and restrictions (for example, one offer per customer or specific redemption periods), a daily deal could put your brand in front of thousands of customers that may never have found you otherwise. And they'll find you in a highly influential place—their inbox. The prospect can be especially enticing during an economic downturn.
Small Business Studies
The School of Information Studies at Syracuse University advises small businesses to consider all angles before committing to a daily deal. Factors such as the right price point can make a big difference. With the deal sites getting around 50%, if your typical sale is around $10, you might want to consider a lower deal value.
Another consideration is the type of business you operate. A Rice University study reported that businesses that offer less tangible items—such as photography, health and fitness services, and doctors—had more success with daily deals than restaurants, cleaning services, and retailers. Despite the difference, however, the study noted that 55% to 61% of daily deals were profitable.
Deal Sites on the Decline?
While some recent news for daily deal sites have sounded the death knell, the daily deals industry is alive and well. Sales were steady through the holidays and business models for deal sites continue to evolve and adapt to the changing marketplace. Even with a slew of deal sites, new ones continue to come on to the market.
If you think a daily deal makes sense for you, proceed with caution. Make sure you get the terms you're looking for and don't be afraid to negotiate. Also, consider planning in advance for the onslaught of customers. You never want to find yourself unable to meet demand. And remember, if one deal site isn't offering the arrangement you want, you won't have to look far to find another.